Daily Update: August 7, 2020

Both developed and emerging economies are struggling under the stress of the coronavirus pandemic’s prolonged economic impact.

In the U.S., officials in Washington have yet to complete negotiations on the terms of an additional stimulus package as a resurgence of outbreaks has increased the country’s chances of a prolonged recession.

The spiking and spreading of coronavirus cases across the U.S. in July is testing the strength of June’s recovery momentum, according to S&P Global Ratings Chief U.S. Economist Beth Ann Bovino. She projected in a report this week that that “the probability of an even worse economic outcome is 30%-35%, up from 25%-30%” and that “the once-hopeful bounce-back in the third quarter (22.2% annualized growth in real GDP in S&P Global Economics’ June forecast) is very much at risk of weakening.”

“The fiscal policy response to the pandemic had a massive impact on GDP growth in the second quarter, boosting it 14.6 percentage points at an annual rate … [which] illustrates how much worse the decline would have been if not for federal fiscal policy,” the Brookings Institute said in its Hutchins Center Fiscal Impact Measure report this week.

Chapter 11 filings in the U.S. increased 52% year-over-year last month—to 643, from 423 last year, according to the American Bankruptcy Institute. The federal stimulus disseminated through the government’s Coronavirus Aid, Relief, and Economic Securities Act is likely to thank for pushing the total commercial bankruptcy filings down 17%.

“We anticipate filings increasing in the next few months as more households and companies seek the shelter of bankruptcy amid intensifying financial distress,” ABI Executive Director Amy Quackenboss said on Aug. 6.

Roughly 167,000 private sector jobs—dramatically less than the expected 2 million—were added to the U.S. workforce in July, according to the payroll provider ADP. Ahead of the U.S. nonfarm payroll report today, Ms. Bovino predicted 1.25 million new jobs had been created last month. Although equity markets have often responded positively to any nonfarm payrolls number, "this may be a near-term bottom as virus-related business closures will likely put upward pressure on the U.S. jobless rate later on," Ms. Bovino said in an S&P Global Market Intelligence interview.

The nonfarm jobs total “could be the trigger for politicians in Washington to realize the need for another significant fiscal package, with the possibility that it leads to more stimulus from the Federal Reserve—both of which would be equity positive,” ING Economics’ Chief International Economist James Knightley told Market Intelligence.

In many emerging markets, the spread and intensity of the coronavirus hasn’t subsided, despite best efforts. Brazil, India, Mexico, and South Africa suffered calamitous surges of the contagion in July.

“The recovery in most emerging markets has generally been very slow, and the tightening of movement restrictions, along with the rise in risk aversion on the part of consumers and businesses, likely took a toll on the July economic activity,” S&P Global Ratings said in an Aug. 6 report. “The impact of COVID-19 is now showing up in lower ratings and the rising pace in defaults. If downside risks materialize, corporations will remain pressured, many small- to mid-size enterprises could go bankrupt, unemployment will rise, and financial institutions could take a hit as nonperforming loans increase. Such a scenario would result in further downgrades and defaults.”

Second-quarter growth data is beginning to paint a gruesome portrait of the severity of countries’ downturns, especially in Latin America.

Activity in the regional economy was down roughly 45% from pre-pandemic levels last month. Mexico experienced its worst-ever GDP decline in the second quarter, shrinking 17.3%. Brazil appears to be recovering faster than the majority of its neighboring economies while still facing the world’s second-highest total of coronavirus cases after the U.S.

Emerging markets are also susceptible to the effects of lockdowns in developed nations, dampening the possibility of recovery in developing economies and adding to pessimism about global demand, trade, and commodity prices, according to S&P Global Ratings.

The likelihood of another large-scale lockdown across the U.S. is low, but “unless the spread of the virus is controlled in the coming weeks … the surge in COVID-19 cases and hospitalizations have raised concerns that it may take longer, or a double-dip recession may be on the horizon,” Ms. Bovino said in her report.

Today is Friday, August 7, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Emerging Markets Monthly Highlights: COVID-19 Persists, Increasing Downside Risks

COVID-19 has not receded in most key emerging markets (EMs) despite governments' efforts, while only few EMs have made progress. Many key EMs have tightened containment measures, delaying phased openings or re-introducing selected measures to contain the spread of COVID-19. These conditions cloud the panorama for a recovery. Downside risk to growth in EMs is also increasing, due to the rising threat of a second wave of COVID-19 infections in several developed economies. A re-imposition of lockdowns in those economies, as they try to contain a potential second wave, could result in another bout of pessimism towards global demand, trade, and commodity prices, slowing the recovery that many EMs had seen in recent months. The impact of COVID-19 is now showing up in lower ratings and the rising pace in defaults.

—Read the full report from S&P Global Ratings

European Corporate Recoveries Over 2003-2019: The Calm Before The COVID-19 Storm

In this ninth edition of S&P Global Ratings' empirical study of European defaulted corporate debt instruments, S&P Global Ratings looks at the recovery performance of 1,354 instruments over a 16-year period from 2003 to 2019. S&P Global Ratings sees this as a useful benchmark, especially as S&P Global Ratings' default rate assumptions for 2020 have risen to double digits, increasing focus on the expected recovery rates. At the time of default, the issuers of these debt instruments had either an issuer credit rating or a credit estimate from S&P Global Ratings. The face value of these debt instruments increased to $250 billion from $239 billion (2003-2019). S&P Global Ratings' methodology for this report is unchanged from the eighth edition, and is largely the same as that of S&P Global Ratings' LossStats database.

—Read the full report from S&P Global Ratings

ESMA’s Stress Test Gives Clearinghouses Food For Thought

With all the real-life stress and volatility that markets experienced over recent months, the European Securities and Markets Authority's (ESMA's) 2019 stress test of clearinghouses (CCPs), released in mid-July 2020, might now seem like little more than a footnote. While in S&P Global Ratings' view this exercise might not have brought any transformational insights, S&P Global Ratings believes it fulfils a specific role and its findings demand further exploration.

—Read the full report from S&P Global Ratings

Treating The Cause, Not The Symptoms: How Societal Factors Are Starting To Shape U.S. Health Care

Social determinants of health (SDOH) are the conditions under which people live and work that affect their health and health risks. They are increasingly reshaping how the U.S. provides and pays for health care. Indeed, both the private and public sectors are recognizing that SDOH will help society achieve a better relationship between health care costs and quality.

—Read the full report from S&P Global Ratings

The Future of Credit

The Upgrade Episode 4: A focus on the Serta Simmons loan restructuring with lenders and how that impacted CLO collateral

The U.S. Leveraged Finance and Recovery team is producing a monthly podcast series entitled “The Upgrade.” This series focuses on leveraged finance issuers that have upward rating potential, providing listeners with concise insights from the primary analyst along with relevant CLO market implications. In the time of Covid-19, other timely topics are also being discussed. In episode 4 of “The Upgrade”, the U.S. Leveraged Finance and Recovery team discusses the why and how of the capital restructuring of Serta Simmons and what that meant for CLOs that held the loans before and after the restructuring. Guests are analysts from the corporate rating team, the recovery team and the CLO team at S&P.

—Listen and subscribe to The Upgrade, a podcast from S&P Global Ratings

SF Credit Brief: U.S. CMBS Delinquency Rate Declines By 51 bps But Remains Elevated, With Specially Serviced Loans On The Rise

The overall delinquency (DQ) rate for U.S. commercial mortgage-backed securities (CMBS) transactions decreased by 50 bps month over month, to 8.53% in July. Despite the decline, the DQ rate continues to be higher than what S&P Global Ratings has seen since S&P Global Ratings started tracking the comprehensive CMBS portfolio DQ in January 2017. By dollar amount, total DQ decreased $3.06 billion month over month and increased $39.52 billion year over year, to $50.77 billion. Since January 2017, the overall DQ rate has increased by 422 bps. The average year-over-year change in the DQ rate also rose for a third consecutive month.

—Read the full report from S&P Global Ratings

U.S. And Canadian Credit Card ABS Performance Risk Increases As Unemployment Supplements Wane

U.S. and Canadian credit card collateral performance has remained steady since the onset of COVID-19 restrictions in March, cushioned by originators' forbearance programs, unprecedented government pandemic assistance payments, and the strong credit profile of the collateral pools. However, S&P Global Ratings believes the expiration of supplemental unemployment insurance payments in both countries pose risks for future collateral performance--if the labor market doesn't return to normal soon.

—Read the full report from S&P Global Ratings

Banking Sector Under Pressure

Deposits surged and NIMs compressed YOY for US community banks in Q2

The first full quarter of COVID-19 brought ballooning deposits and compressed net interest margins for most U.S. community banks. Deposit growth surged year over year for most community banks, partly due to various government stimulus programs. But the Federal Reserve slashing interest rates and participation in the Small Business Administration's Paycheck Protection Program weighed on net interest margins for many smaller lenders. While PPP loans boosted year-over-year loan growth for the quarter ended June 30, banks are being more conservative with underwriting practices due to the economic uncertainty.

—Read the full article from S&P Global Market Intelligence

Mergers, nonbank investors key to survival for battered regional banks in Japan

More regional lenders in Japan may need to merge with peers or seek new capital from nonbank investors, as their already weak profitability is further hit by rising default risk and loan-loss provisions due to COVID-19, analysts say. The combined unconsolidated net income of listed regional banks in Japan could drop by another 10% to ¥532.9 billion in the current fiscal year ending March 2021, according to the Regional Banks Association of Japan. Earnings of these banks, which primarily serve rural communities that have for years been hit by aging population and low economic growth, had shrunk by almost 40% in the four fiscal years ended March 2020, while their loan-loss provisions increased more than fivefold, according to the association.

—Read the full article from S&P Global Market Intelligence

Uncertainty has banks holding off on PPP forgiveness process

Many financial institutions are holding off on accepting Paycheck Protection Program loan forgiveness applications until the regulatory and legislative picture becomes clearer. Banks must ensure their borrowers are taking the necessary steps to receive forgiveness for their Small Business Administration loans that were part of the program Congress created in March to help businesses cope with the COVID-19 pandemic. But banks are grappling with the complexities of the PPP forgiveness application, and some are concerned that legislation will soon change the rules that govern the process.

—Read the full article from S&P Global Market Intelligence

Technology & Innovation

Work-from-home surge stress-tested ISPs, cloud for lasting changes – analysts

Global internet outages skyrocketed in March before falling somewhat to still higher-than-normal levels in June, as service providers worked to adapt to record levels of work-from-home-related traffic. Cloud-based applications were more stable, with about 10 times fewer overall outages than internet service providers, though the percentage of cloud outages registered less sustained improvement between June and January, according to an Aug. 4 report by internet and network-service monitoring firm ThousandEyes Inc., which is in the process of being acquired by Cisco Systems Inc.

—Read the full article from S&P Global Market Intelligence

Big bet on digital technology helps Adidas stay fit amid pandemic

The millions of euros that Adidas AG has spent over the last three years on digital technology enabled the company to weather the COVID-19 storm in the first half of 2020, a strategy it now wants to bolster with more investments. "Digital is and will continue to be our most important commercial and brand driver," said Kasper Rorsted, CEO of Adidas, in an Aug. 6 earnings call with analysts. "We leveraged our entire digital ecosystem in order to nearly double e-commerce sales in the second quarter."

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

Dominion to fuel growth with clean energy after abandoning $8B pipeline

Dominion Energy Inc. plans to sharpen its focus on cleaner energy resources and its state-regulated utilities following separate decisions to abandon the Atlantic Coast natural gas pipeline project and sell its gas transmission and storage assets. Dominion Chairman, President and CEO Thomas Farrell II told analysts and investors on a July 6 conference call that the company will continue to "aggressively" pursue renewable energy, storage, nuclear license renewals, electric vehicle infrastructure and energy efficiency programs.

—Read the full article from S&P Global Market Intelligence

Prospect of Biden win highlights vulnerability of 4 major power, climate rules

On a phone call with reporters in early June, U.S. Environmental Protection Agency Administrator Andrew Wheeler indicated that a steady drumbeat of proposed regulations and final rules will continue as President Donald Trump nears the end of his first term. "I'll be back with you again at our next announcement, which shouldn't be too long," Wheeler said after describing a proposal that would dramatically alter how the EPA accounts for fine particulate matter reductions in Clean Air Act rulemakings. "We keep cranking things out."

—Read the full article from S&P Global Market Intelligence

The Future of Energy & Commodities

Energy markets feel brunt of pandemic on global commodities

The COVID-19 pandemic has wreaked chaos across global commodity markets, disrupting trade and supply and demand dynamics and creating major uncertainty over the pace of recovery. The global growth outlook has been slashed for years as the economy braces for a multi-year recovery and the prospect of long-term changes in consumption.

—Read the full article from S&P Global Platts

After nearly 20 years, India's oil demand seen slipping into the red

Hopes that India's oil demand will recover in the second half of the year is fading fast as some provinces implement partial lockdowns to battle the COVID-19 pandemic, prompting refiners to start planning for lower crude runs in order to prevent a problem of plenty at home. India, one of the fastest growing oil markets in Asia in recent years, is expected to end 2020 with its oil demand slipping into the red, a trend not seen for nearly two decades, as per government officials and oil analysts.

—Read the full article from S&P Global Platts

Write-downs, dividend cuts define Q2 earnings season for oil supermajors

It came as no surprise to analysts that the second-quarter earnings season was more brutal than the first for the integrated oil and gas majors as the impacts of the COVID-19 pandemic prompted not only a wave of additional spending cuts but also hefty write-downs and dividend cuts. Typically oil companies do all they can to protect dividends in times of financial hardship, but tough times can force difficult decisions.

—Read the full article from S&P Global Market Intelligence

Where next for oil prices as OPEC eases cuts?

OPEC and its allies are loosening the reins around production cuts amid tentative signs of an oil demand recovery, which is likely to bring additional heavier sourer barrels back on to the market. Gillian Carr and Paul Hickin discuss with Joel Hanley how this could play out in the months ahead.

—Listen and subscribe to Oil Markets, a podcast from S&P Global Platts

Written and compiled by Molly Mintz.